With new regulations on the way and government enforcement actions resulting in hefty penalties, the overdraft protection plans at several banks and credit unions are getting much more attention than they used to.

A class action investigation is now being conducted to find out if the overdraft protection policies and practices at many of these institutions, including Citizens Equity First Credit Union, runs afoul of existing laws.

Investigating Citizens Equity First Credit Union

One of the institutions falling within the current class action lawsuit investigation is Citizens Equity First Credit Union. Established in 1937, this Illinois-based credit union says it now has more than 300,000 members.

Citizens Equity First Credit Union offers three options for overdraft protection:

• Overdraft Protection. By default, every CEFCU checking account and insured money market account is enrolled in Overdraft Protection. Under this option, the credit union reserves discretion to cover overdraft checks, electronic transfers, and similar items. Since this option is at the credit union’s discretion, there’s no guarantee that any particular overdraft will be covered. The credit union charges $30 for each item covered by Overdraft Protection, up to a $120 per day maximum.
• Debit Overdraft Protection. CEFU offers similar protection for ATM and debit card transactions. Members must affirmatively opt into this service. As with Overdraft Protection, the same fees apply: $30 per covered overdraft, with a $120 per day maximum.
• Overdraft Transfer Plan. Lower  transaction fees are available through the credit union’s Overdraft Transfer Plan. This plan covers overdraft with funds instantly transferred from another account or from a CEFCU credit card. Coverage is automatic and is not discretionary with the credit union.

New Rules from the CFPB

Whether the overdraft policies at Citizens Equity First Credit Union pass legal muster remains to be seen. New rules governing these policies should be on the way soon from the Consumer Finance Protection Bureau.

The agency is expected to formally propose these rules later this year. Advocates say these new rules are necessary because unscrupulous overdraft practices disproportionately harm poorer customers who live from paycheck to paycheck.

According to one recent survey, bank customers considered “heavy overdrafters” tended to rack up overdraft fees that were significantly higher in proportion to their income. Other research shows that the fees assessed can be costly compared to the size of the overdrafts themselves.

Under existing rules, the CFPB has already been pursuing enforcement actions against banks and credit unions whose policies allegedly cross the line. In July 2016, the agency announced a $10 million penalty against one bank, arising out of some allegedly improper overdraft protection practices.

The CFPB says that between 2010 and 2014, the bank had contracted with a telemarketing vendor that supposedly signed customers up for overdraft protection without those customers’ consent.

The vendor’s representatives also allegedly misled customers into thinking the service was free, and they supposedly told customers they would be charged overdraft fees whether or not they signed up for the service.

While the bank neither admitted nor denied the allegations, it did say that it had terminated its relationship with the vendor in question, and it expressed regret for not adequately supervising that vendor.

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